Wednesday, 26 March 2014

GDP growing out-of-date

GDP is becoming
increasingly outdated as we do more and more online

It is hard for most of us to keep up with the blistering pace
of changes in modern technology. This is
also true for economists and the discipline of economics. Nowhere is this more glaringly obvious than when
trying to assess how well the economy is doing.
Measures such as GDP (gross domestic product) hark from a time when our
economy was mostly made up of physical goods which did not improve much over
time (such as fridges or lawn mowers). Advances
in computing were already making life hard for economists, but greater use of
online services may be the last straw. How
can we measure the economic output if we can get stuff online for free?

More is better?

GDP is an aggregate figure of the market value of all goods
and services produced in an economy. This
way of measuring output focuses only on transactions where money changes hands and
is based on the premise that more is better.
Things have become more complicated with rapid improvements in
technology. The problems started as exponential
leaps in processing power made computers both faster and cheaper. Progress is now so rapid that computers from
just a few years ago are no longer available, making price comparisons over
time near impossible (also causing issues with measuring inflation).

The impact is spreading as people find better ways of
putting cheap computing to good use. Replicating
any content in digital form is virtually without cost. Thus, the problems that initially confronted the
music industry were soon felt by TV and movie studios as well as newspapers. The effects are becoming more pervasive now
that almost all of us have small computers in our pockets in the form of mobile
phones. Even mobile network providers, who
would have been expected to benefit from greater use of mobile phones, are
under pressure from cheaper alternative methods of communicating such as Skype
or WhatsApp.

What really matters

Things we may have needed to pay for in the past are now
considerably cheaper if not free, whether it be making international phone calls,
reading the news, or posting job ads. Computers
are also able to do most of the grunt work of online services, making it easier
to launch new products. For instance,
WhatsApp, which was recently purchased for US$19 billion, only has around 50
employees. As a result, computers and
the Internet can be used to provide more for less.

It follows that a stationary GDP does not necessarily
indicate a lack of progress. This
creates a dilemma for economists.
Economic data such as GDP is usually trimmed back to take account of
inflation as higher prices by themselves do not mean that the economy is any
larger. Yet, better computers and cheap
services provided online suggest that normal GDP figures need to be increased
to account for the wealth of benefits that are available without having to pay more
money.

All of this tweaking of GDP is making the actual data less
and less significant. The weak recovery
in places such as the UK may be due to a shift towards doing things online as
people try to tighten their belts. It
may be the case that similar or even greater amounts of goods and services are
being consumed but online and at a lower cost.
How can we account for this?

Rather than trying to add up everything in the economy, we could look at median earnings and how people spend their cash (including online freebies). This is likely to be a better
gauge at a time when wages are stagnating for most people. Finding out whether the average person is
better off has more real world relevance than focusing solely on levels of production.